Ferrari (NYSE:RACE) Succeeds Where All Others Fail

Ferrari (NYSE:RACE) Succeeds Where All Others Fail

In terms of pure profits, high-end luxury cars tend to do well. Mercedes makes a hit on each S-Class that is sold and BMW dominates the market with profits from its 3 Series.

This is because despite having higher production costs, the designing, engineering, and materials do not amount to a much larger investment than the their regular mid-line models.

The part where it all comes together is when the premiums on these luxury cars are taken into account.

Luxury car prices are much higher than any model VW’s MSRP, so Mercedes and BMW get a larger slice per car sold.

Even though Mercedes and BMW make fewer cars than Volkswagen (OTCMKT:VLKAY), they are huge companies when compared to Ferrari (NYSE:RACE).

The iconic Italian Supercar maker still does things old school, and it costs a lot.

While all 3 of the Germans have adopted Ford’s assembly line style of production, Ferrari makes its cars by hand, ensuring that it has to pay humans a wage instead of investing in robots.

It also means that the time to produce each car goes up, way up, ensuring that more wages are paid for a smaller amount of work.

After factoring in the cost that it takes to hand build every car, pay top salaries for expert craftsmanship, bestow its racing cars with expensive materials like carbon fiber, and utilize some of the world’s best engineering talent to knock of extra 1/10th of a sec off of lap times, it starts to add up.

The fact is, making a Ferrari costs a lot more than a any normal car, and even though a Ferrari also costs quite a bit more, its low sales numbers mean that it cannot make up for this gap in production investment by selling a huge amount of cars like BMW, MBZ or Volkswagen.

Another cost to consider is that Ferrari has a racing brand, that is its addictive mainstay.

You will never see a more “money sucking” addiction than racing, whether it is motorcars or horses, and Ferrari is in many circuits from Formula One to Le Mans.

This pursuit of cash for racing efforts is part of why Ferrari sold out to Fiat (NYSE:FCAU) after almost becoming a Ford (NYSE:F) brand in the early 1970’s.

The Big Q: How does this small Italian company make enough money to survive?

The Big A: Ferrari it is not only making enough cash to get by, but posts some of the largest profits that it has ever done.

It makes these high marks despite the fact that the company caps its production numbers rather than allow Supercars to wheel freely out of Maranello.

In Y 2011 Ferrari made about $62,000 per car it sold, meaning: that given its expenditures for that year, the profit margin on a Ferrari is 15%.

This is one of highest profit margins in the auto industry, it nears the profit margins seen in the ultra-luxury goods sector.

To keep profits this high, Ferrari mastered the art of balancing supply and demand.

Its keeps its Supercars exclusive enough that a 2 year waiting list is required for a new one, customers are always more than happy pay over lots cash to be blessed with a Ferrari.

Meanwhile, just enough cars come out of Maranello to keep the Black ink running on the P&L. All of this is quintessential Ferrari, it pulls it off in a very special way, a way that is unique to its brand.